Don’t Fight Over Defense ETFs, Understand Them

Year-to-date though February 23, just one aerospace and defense ETF  – the iShares US Aerospace & Defense ETF (ITA B) - was among the top 100 most-searched ETF tickers on the ETF Database platform. Yet in the subsequent month, three other ETFs joined this list while ITA rose 46 spots to be the fourth most-trafficked ticker. The SPDR S&P Aerospace ETF (XAR B+), the Invesco Aerospace & Defense ETF (PPA B+), and the ARK Space Exploration & Innovation ETF (ARKX) were the three other related ETFs that users of our platforms expressed interest in over the last month. 

ITA, PPA, and XAR have also gathered nearly $2 billion in combined net inflows in the past month, erasing previous outflows in the past year; ARKX launched at the end of March 2021 and has seen minimal inflows in the past month despite high traffic.

Aerospace and defense companies, such as Boeing (BA), Lockheed Martin (LMT), and Raytheon Technologies (RTX), are part of the industrials sector. The sector is the sixth-largest in the S&P 500 Index, tracked by the SPDR S&P 500 ETF (SPY A), representing 8%, just smaller than communications services. However, the aerospace and defense industry was recently the largest group for the $16 billion Industrials Select Sector SPDR (XLI A) at 20% of assets, ahead of machinery, industrial conglomerates, road & rail, and air freight & logistics. The industry is also well-represented in broad industrial sector ETF peers like the Fidelity MSCI Industrials Index ETF (FIDU ) and the Vanguard Industrials (VIS A+).

Advisors and investors seeking to augment pre-existing exposure to the aerospace and defense industry should be aware of both the fundamentals of key companies in the industry and what makes the related ETFs distinct. 

Upon reporting fourth quarter 2021 results, RTX forecast 2022 sales of approximately $69 billion, a 7% increase from the prior year. Meanwhile, LMT projected 2022 net sales of $66 billion, slightly lower than the $67 billion achieved in 2021. These projections have not been updated since Russia invaded Ukraine in February and geopolitical tensions accelerated. 

While aerospace and defense companies have been in favor in 2022, investors should also be mindful that industry sentiment can quickly shift, sending shares of more concentrated industry funds unexpectedly lower.

With $3.6 billion in assets, ITA is the largest of the quartet of popular aerospace and defense ETFs, and it has high exposure to the mega-cap companies such as RTX (22% of assets), LMT (15%), and BA (8%). In contrast, the $1.8 billion XAR is equally weighted with approximately 4% of assets spread across large-caps like BA and RTX and smaller-caps like Maxar Technologies (MAXR) and Virgin Galactic Holdings (SPCE). 

PPA is the third $1 billion-plus fund of these industry ETFs, and it looks more similar to ITA but is less top-heavy. LMT and RTX are the top two positions at approximately 7% of assets each, with Northrop Grumman (NOC) and General Dynamic (GD) joining BA in the top five.

Meanwhile, ARKX’s name might give the impression that it is tied to a different theme, but the ETF holds many aerospace and defense companies such as Kratos Defense & Security Solutions (KTOS) and L3Harris Technologies (LH) in addition to firms that develop technology that enables space exploration, as well as robotics, artificial intelligence, materials, 3D printing, and energy storage. The $425 million ARKX is the lone actively managed ETF of the quartet and is also the only one to be down year-to-date through March 23.

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